Amazon Stock Dropping—Why? Sell-Off Too Much?

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What could be causing Amazon stock to drop? The management has issued a warning that sales are not living up to expectations despite the fact that the holiday season is only a few weeks away, and the outlook has become more negative. This runs counter to the trend in the overall e-commerce business, which has seen a big boost in stock prices for companies like Shopify Inc. (NYSE:SHOP) after the company reported revenue and profitability that beyond analysts' forecasts.

The management team at Amazon has projected that the company's revenue for the fourth quarter will climb by anywhere from 2% to 8%, with revenue coming in between $140 billion and $148 billion. According to Refinitiv, this is in contrast to the $155 billion that was anticipated by analysts. In spite of these challenges, institutional investors have continued to place their bets on the stock's positive prospects in the long run.

The amount of money brought in is higher than what was anticipated.
Amazon has experienced growth in the double digits as compared to previous quarters, as evidenced by the fact that its revenue climbed by 15% during the third quarter. In recent times, Andy Jassy, Amazon's new CEO, has responded to the macroeconomic headwinds by lowering capital expenditures and cutting costs. In addition to this, he decreased the capacity of the warehouse at the same time that the company was reevaluating its expenses.

Retail business activities

The primary factor that has had an impact on Amazon's rate of growth is the persistently high levels of inflation, which have been around 8% over the past few months. The increasing inflation has a negative impact on the retail industry since customers are cutting back on their spending.

Comparatively, sales in North America climbed by 20% year over year (YOY), reaching $78.8 billion, while sales internationally decreased by 5%, reaching $27.7 billion, but increased by 12% when accounting for the impact of currency exchange rates.

The retail sector's sales are unmistakably on the rise, but growth is being held back by a stronger currency, which is only going to get stronger in the near future. The current run rate is on a positive trajectory, and consumer sentiment hasn't deteriorated to the extent that would support the market's pessimism, so it's possible that pessimism is being exaggerated.


AWS experienced a moderate slowdown, with growth totaling 27% year over year. AWS has proven essential to Amazon's ability to generate revenue. After accounting for the effects of fluctuating foreign exchange rates, the segment's overall contribution to total revenue was 28%.

The downturn shouldn't come as a surprise given that the technology sector has been experiencing layoffs and demand has decreased significantly more than in other industries. Even while 27% is still a good rate of growth, investors have been accustomed to seeing much higher rates of growth than this.

Services Available via Subscription

Following the trends of companies such as Netflix (NASDAQ:NFLX) and general content-based businesses, which have all seen a significant slowdown, subscription services have also seen their growth slow from high double digits to single digits. Previously, they had experienced growth in the high double digits. The content industry is plagued by pricing pressure as well as high production costs, both of which impact heavily on results.

Services Related to Advertising

The market for advertising services has shown encouraging signs of recovery, with growth reaching 25% for the quarter. This is an acceleration from the previous quarter's results, which showed growth of approximately 13% to 15%. Recent years have seen a reduction in the amount spent on advertising, but due to Amazon's execution, the performance of the sector is bucking the overall trend.

The Performing Capabilities of Amazon Finances
Because of the large drop in cash flow, Amazon's stock was able to fall to the extent that it did. The operating cash flow had a negative year-over-year change of 27%, coming in at $39 billion. During this time, the amount spent on capital expenditures rose by 14%.

In spite of a lower repayment of principal leases, free cash flow decreased from $12 billion in the previous quarter to a negative total of $19 billion in the most recent quarter. Amazon has no plans to reduce the amount it spends on capital investments.

As a result, there is a possibility that the impact on cash flow will continue for some time. The operating income has dropped to the low single digits (2%), and there will be continued pressure on the cash flow for some time. Because the corporation has over $96 billion in cash and marketable securities at the moment, it should not experience any problems with liquidity.

Amazon's Outlook

Despite the present climate, which includes currency headwinds and falling retail sales, Amazon's future is clearly not as bleak as the market anticipates it to be. This is the case despite the fact that results have been negatively impacted. The current average price that analysts have projected for the stock is $175, which is an increase of 58%.

It's possible that this is on the high side, but a much more feasible objective would be between $125 and $127, with an upside of almost 15%. As a result of the large drop in earnings per share, the price-to-sales ratio went down to 2.44. Over the course of a longer period of time, the net income margins are likely going to climb back to 7% to 8%, and the forward P/E ratio is likely going to be around 30-35.

The top line should continue to rise at a moderate pace and should bring in stronger results for the fourth quarter than investors now anticipate it will. There is a good chance that earnings and cash flow will continue to face challenges for a few more quarters.

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